Business Context and Reporting Period
Company: CBIZ, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: CBIZ provides professional business services, including financial services, employee services, medical management professionals (MMP), and national practices. The company operates primarily in the United States and parts of Canada, serving businesses, individuals, governmental entities, and not-for-profits. The company's strategy focuses on organic growth, cross-serving existing clients, and targeted acquisitions.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $732.5 million | $739.1 million |
| Operating Income | $56.1 million | $57.4 million |
| Net Income | $24.5 million | $31.4 million |
| Diluted EPS (Continuing Ops) | $0.48 | $0.52 |
| Diluted EPS (Net Income) | $0.42 | $0.51 |
| Cash Earnings per Diluted Share | $1.02 | $0.99 |
| Adjusted EBITDA | $82.0 million | $84.6 million |
| Total Assets | $756.3 million | $713.1 million |
| Total Liabilities | $526.6 million | $442.5 million |
| Stockholders' Equity | $229.7 million | $270.6 million |
| Long-Term Debt | $235.7 million | $203.8 million |
| Cash Flow from Operations | $53.3 million | $49.6 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 0.9% to $732.5 million. This was driven by a $26.7 million (3.6%) decline in same-unit revenue, partially offset by $20.1 million in revenue from newly acquired operations.
- Margin Compression: Operating expenses increased as a percentage of revenue to 88.3% from 88.1% in 2009. Gross margin percentage declined to 11.7% from 11.9%.
- Earnings Impact: Net income decreased 21.9% to $24.5 million. Diluted EPS from continuing operations fell to $0.48 from $0.52. This decline included a $2.0 million pre-tax loss on the retirement of convertible bonds and a $1.7 million pre-tax restructuring charge related to facility consolidation.
- Debt Structure: The company issued $130.0 million in 2010 Convertible Senior Subordinated Notes. Proceeds were used to repurchase $60.0 million of 2006 Notes, repurchase 4.6 million shares of common stock, and pay down the credit facility. Total debt increased due to the new issuance and increased borrowings under the credit facility to fund share repurchases and acquisitions.
- Acquisitions: CBIZ acquired four businesses in 2010 (Goldstein Lewin, National Benefit Alliance, Benexx, and KRMT) with an aggregate consideration of approximately $49.6 million.
Guidance, Outlook, and Risks
- Outlook: Management expects revenue growth through organic growth, cross-serving, and acquisitions. The company continues to evaluate share repurchase opportunities when accretive to shareholders.
- Capital Allocation: The company prioritizes strategic acquisitions and share repurchases. A significant portion of cash flow is dedicated to interest payments on debt.
- Key Risks:
- Revenue Sensitivity: High fixed operating costs mean revenue declines can disproportionately impact earnings.
- Receivables: Slower collections or uncollectible accounts could adversely impact liquidity.
- Healthcare Regulation: Changes in healthcare legislation and reimbursement rates could adversely affect the MMP segment.
- Debt Covenants: The company must maintain specific financial ratios (leverage, fixed charge coverage) under its credit facility. Failure to comply could result in default.
- Auction Rate Securities (ARS): The company holds ARS investments that have experienced failed auctions, impacting liquidity and potentially requiring future impairment charges.
- Legal Proceedings: The company is named as a defendant in lawsuits related to the bankruptcy of Mortgages Ltd. Management believes the allegations are without merit and does not expect a material adverse effect.
Investor Verification Checklist
- Debt Maturity: Verify the repayment plan for the remaining $40 million of 2006 Notes, which are callable/putable in June 2011.
- Same-Unit Revenue Trends: Monitor the 3.6% decline in same-unit revenue to assess the health of the core business excluding acquisitions.
- ARS Liquidity: Review the status of the $13.4 million par value of Auction Rate Securities held for clients and potential future impairment charges.
- Share Repurchases: Confirm the status of the $48.2 million repurchase from Westbury (Bermuda) Ltd. and the option to purchase remaining shares.
- Goodwill Impairment: Assess the $344.1 million goodwill balance, particularly in the MMP and Payroll segments, given the revenue declines in those areas.